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2017 China Insurance Review

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2017 China Insurance Review 2017 Insurance Review FEBRUARY 2018 Thomas P. Fitzgerald Chairman Winston & Strawn LLP Foreword The continued growth of China’s insurance market means more opportunities for established and new insurance companies and insurance intermediaries looking to expand or create a foothold there. Winston & Strawn, a leading expert in cross-border M&A, contentious, and regulatory work, established offices in Hong Kong in 2008 and in Shanghai in 2009 in order to better serve our clients that operate in Asia. Our presence in Hong Kong and Mainland China has allowed us to broaden our services and extend the reach of our practices to include insurance expertise for the PRC. I hope that you find this booklet useful. Please feel free to reach out to our China team should you have any questions or require any additional information. You will find their contact details at the end of this booklet. Attorney advertising materials – © 2018 Winston & Strawn LLP 1. Introduction The overall outlook for China’s insurance industry has enjoyed robust growth in recent years. Total premium income, for example, China is healthy and rose 27.5% in 2016 to reach RMB 3.1 trillion (USD 490 billion), the strongest growth the industry has enjoyed statistics for 2017 show since 2008. As well, by the end of 2016, total insurance industry assets stood at RMB 15.12 trillion (USD 2.39 that overall insurance trillion), a 22.3% increase from the start of the year. Premium growth slowed in 2017 due in large part to premium income rose China Insurance Regulatory Commission (“CIRC”) reforms aimed at universal life insurance. Nonetheless, the overall 18.6% from a year earlier outlook for China is healthy and statistics for 2017 show to RMB 3.66 trillion (USD that overall insurance premium income rose 18.6% from a year earlier to RMB 3.66 trillion (USD 571.33 billion). 571.33 billion) This booklet provides an overview of key developments in the PRC insurance industry in 2017 and explains how These priorities were confirmed and further developed in these developments impacted foreign investors in 2017 the December 2017 Central Economic Work Conference, or may impact foreign investors in 2018. It then moves on which effectively set the tone for China’s 2018 economic to an attempt to forecast regulatory trends in 2018 and policies. Thus, this agenda is clearly reflected in, and beyond. It concludes with a discussion of some statistical indeed may be the impetus behind, many of the trends highlights and key growth drivers of China’s insurance and developments discussed herein. industry. Key insurance-specific developments that occurred in 2017 include, among others: 2. Developments in 2017 • the Ministry of Finance announcing in November that Overall, 2017 was both an exciting and turbulent it will further open the door to foreign investment in year for China’s insurance industry. In particular, 2017 China’s life insurance industry; encompassed both the annual plenary sessions of China’s two national-level decision-making bodies, the • the CIRC promulgating requirements for collateral in National People’s Congress and National Committee of cross-border reinsurance transactions and concluding the Chinese People’s Political Consultative Conference, a framework agreement for China–Hong Kong mutual and a meeting of the highest body (formally speaking) solvency recognition; within the Communist Party that occurs only once every five years, the 19th National Congress of the • the CIRC implementing a wave of new regulations Communist Party of China. In both instances, the meant to address excessive risk and to reorient the Chinese government clearly communicated its national industry towards long-term sustainable growth; economic and social agenda, which overall seems likely to have a positive effect on the medium- to long-term • the State Council establishing a cabinet-level super development of the insurance industry. Specifically, it laid regulator to coordinate financial regulation; and out a relatively low-growth (i.e., 6.5% for 2018) agenda that prioritizes reducing financial risk and deleveraging • China’s new Cybersecurity Law coming into force. the economy while encouraging “quality growth,” greater openness to foreign investment, and giving priority to We discuss each of these developments in further detail social development. below. © 2018 Winston & Strawn LLP 2 on the reinsurance treaty, unless such offshore reinsurer In November 2017, the has provided eligible collateral. On 23 February 2017, the CIRC promulgated the Notice Ministry of Finance on Matters Relating to Collateral Provided by Offshore announced that, among Reinsurers, which specifies that the following types of collateral make offshore reinsurance eligible for a lower other things, it will allow risk factor under C-ROSS: qualified foreign investors • cash deposits into the Chinese ceding company’s bank account with a commercial bank established in China, to take majority stakes subject to certain other requirements; in Chinese life insurance • a standby letter of credit that names the Chinese ceding company as the beneficiary, is irrevocable, joint ventures clean, and unconditional, and satisfies certain other requirements; and 2.1 Further Opening of the Market • other collateral recognized by the CIRC. to Foreign Investment Whether the clarity provided by this notice will lead After US President Donald Trump’s visit to the PRC in to increased opportunities for foreign reinsurers in November 2017, the Ministry of Finance announced that, China remains to be seen. At the time of this booklet’s among other things, it will allow qualified foreign investors publication, the general view amongst reinsurers was to take majority stakes in Chinese life insurance joint pessimistic on the basis that “other requirements” were ventures. Regulators are still drafting detailed rules, but too demanding. the key change involves raising the foreign-ownership cap for life insurance companies from 50% to 51% after PRC–HK Mutual Solvency Framework three years and removing it entirely in five years. Agreement On 16 May 2017, the CIRC concluded a framework In the wake of this announcement, multiple foreign agreement with the Hong Kong Insurance Authority insurance companies have announced plans to further (“HKIA”) to achieve mutual recognition that the solvency expand existing operations in China by taking a larger regimes of the PRC and Hong Kong are equivalent stake in their joint ventures. (“Framework Agreement”). Under the Framework Agreement, the CIRC and the HKIA aim to complete an equivalence assessment of their solvency regimes within 2.2 Developments in Reinsurance four years (note: Hong Kong has yet to develop its own RBC regime). Mutual equivalence recognition is meant to CIRC Requirements for Collateral in Offshore help increase cooperation between the two regulators, Reinsurance Transactions provide regulatory and supervisory convenience, and By way of background, China’s risk-based capital prevent administrative overlap. (“RBC”) regime, the China Risk Oriented Solvency System (“C-ROSS”), came into effect in 2016. C-ROSS If the Framework Agreement is implemented, insurers, generally applies a higher risk factor to reinsurance reinsurers, and brokers operating in these markets could ceded to offshore reinsurers. Furthermore, though potentially see significant benefits. As noted above, C-ROSS does not require that collateral be provided by C-ROSS currently accords unfavorable capital treatment offshore reinsurers, it subjects uncollateralized offshore to reinsurance by reinsurers that operate in the PRC reinsurance to an even higher risk factor. Essentially, this on a non-admitted basis. Recognition of Hong Kong’s means that C-ROSS applies a higher minimum capital RBC regime as equivalent under C-ROSS may end such requirement to the PRC cedant to guard against the unfavorable capital treatment of Hong Kong reinsurers. counterparty risk that the offshore reinsurer will default It is too early to say for sure, but this may provide © 2018 Winston & Strawn LLP 3 opportunities for foreign reinsurers to expand their Failure to collect and handle personal information in operations in Mainland China by way of Hong Kong. accordance with the Cybersecurity Law is punishable by a maximum fine of ten times the illegal gain or RMB 1 million (approx. USD 156,000), while the maximum fine for 2.3 PRC Cybersecurity Law illegally transferring personal information outside of China is ten times the illegal gain or RMB 500,000 (approx. The Cybersecurity Law of the People’s Republic of USD 78,000). In addition to the foregoing, the competent China (“Cybersecurity Law”), which focusses mainly on authority may, if the circumstances are serious, issue a cybersecurity and the handling of personal information, temporary suspension order, correction order, or even a came into force on 1 June 2017. Though it does not closure notice to the offending party. specifically target the insurance industry, many of its provisions effectively apply to any organization that operates a computer network in the PRC. Naturally, this includes insurers, which typically collect insureds’ The Cybersecurity personal information in high volumes and store such information on computer networks (that may or may not Law’s potential impact be physically located in the PRC). on insurance market The Cybersecurity Law’s potential impact on insurance market participants is significant, as many of its provisions participants is significant, are onerous. For example, the Cybersecurity
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